EC Reciprocity proposal: a sinking ship

Any discussion of trade, whether over general principles or of technical issues, brings to my mind images of fleets of ocean greyhounds following the trade winds to greener pastures and more exotic locales. This is particularly true concerning the current discussion surrounding the reciprocity regulationput forward by the European Commission (EC), to be exact it makes me think of the expedition of Commodore Mathew C. Perry into Uraga in 1853. But more on that later.

Reciprocity, though it sounds like a legal thriller purchased in an airport bookstore, is an attempt by the European Commission to force non-EU countries to open their public procurement markets. The target countries of this regulation would appear to be China, Japan, and other major trading partners, but encompasses all non-Least Developed Countries (LDCs) that do business with the EU, including lower middle income countries (LMICs) and countries that recently graduated from LDC status. The principle is quite straightforward: If a country does not have an open public procurement market, then firms from that country cannot do business with the EU public procurement market, self-described as the world’s most open procurement market.

There are several major flaws with this approach to procurement liberalisation. From a development perspective there is a concern that in an attempt to force China to open its market, innocent bystanders such as the tens of millions of Chinese still living in poverty, the populations of LMICs, as well as lower income countries (LICs) will have to pay the price. Cambridge University academic, Ha Joon Chang, as well as others have pointed out that no country has successful developed without a certain degree of protectionist measures to protect infant industry, until they were in a position where they could compete internationally. Forcing developing countries to open their markets prematurely could have devastating impacts on the domestic private sector.

Furthermore, as pointed out by Patrick A Messerlin and Sébastien Miroudot, of Sciences Po and the OECD respectively, the premise with which the EC is approaching the issue is deeply flawed in the first place. European markets are not as open as they appear to be. Also the leverage that the EC thinks it could gain by wielding European procurement markets as both a carrot and a stick is not as great as the EC imagines. They point out specifically:

“First is the higher openness of the EU… evidence refutes such claims, in particular when coming from the EU member states the most vocal about reciprocity. “

“The threat of closing EU markets assumes a rapport de force. The credibility of such a threat is already gone: the combined French and German public demand, which was almost eight times larger than China’s public demand in 1995 and three times in 2000, was only 1.3 times larger in 2009.”

They further demonstrate that Chinese markets are in fact more open than the US and Europe, as illustrated in the graph below.

Openness ratios, China, EU and US, 1995-2008

The diminished appeal of European procurement markets needs to be put in context of the austerity policies that are currently being enacted by many member states. The likelihood of increased European demand in a period of economic contraction and wage stagnation in combination with austerity policies limiting public expenditure is remarkably poor.

Now back to Commodore Perry. In 1853 commodore Perry sailed to Japan in order to foster trade negotiations with the Japanese government. Japan at the time was a closed economy that would only trade with my own ancestors the Dutch. In order to encourage discussion he parked his battleships off the coast of Uraga, near the town of Edo, and threatened to begin shelling the town until someone would talk to him. An auspicious start to US-Japan relations. The EC is trying to use reciprocity as a battleship. Like commodore Perry before it, the EC wants to sail into the ports of Nanjing and shell the shore until they open their markets. Unfortunately European austerity measures mean shrinking wages which mean shrinking taxes, which means shrinking public procurement. So unlike Perry, the harbor the EU wants to bombard is already open for business, and the battleship, impressive as it might seem, is aging, has a leak in it and is slowly sinking. All the Chinese have to do is stall for time before EU municipalities and member states are begging for cheap labour and products to meet the needs and demands that a European populace is either unwilling or unable to provide. Ultimately this leaves any leverage that the EC thinks it might gain in bargaining with other countries dead in the water.